How to avoid financial setbacks after getting a raise
Congratulations if you’ve managed to maintain your job this year and are anticipating a raise! However, keep in mind that it’s simple to boost your expenditure when your pay rises, significantly if the raise appears minor. Therefore, before deciding how to spend it, check your payslip to see how much money you get each month, as taxes may be more than you think. Then reevaluate your budget (or, if you haven’t previously done so, understand why it’s so vital to do so). Explore methods to better your financial position with your new raise once you have a firm plan in place for paying all of your obligations on time.
A financial gain is always welcome, whether it comes in the form of a raise, a gift, an inheritance, or a side job, but you must manage the funds carefully. Instead of slipping into poor financial habits, you may use this extra cash to further your financial objectives. Here are some ideal ways to use your money after receiving a raise, no matter how big or small.
1. Calculate the impact of your raise on your take-home income
After obtaining a raise, the first thing you should do is figure out how it will impact your take-home income. You’ll be able to get into the appropriate frame of mind if you do so. A higher raise can help you achieve your financial objectives faster, but a lesser raise (such as a cost-of-living adjustment) may not make a significant difference for each paycheck. We’ll go through this in greater detail later.
You may use online paycheck calculators to predict how much money you’ll get after taxes. I suggest you wait until you get your first paycheck following the raise to see how much you earn (versus the gross amount).
2. A decent rule of thumb is to set aside at least 75% of each raise
It’s critical to comprehend lifestyle creep to prevent it at all costs. While it’s OK to set away a tiny amount for yourself or utilize a portion of your raise on something enjoyable, you don’t want to develop the habit of routinely spending more following each raise.
Consider goods that will make your life more comfortable or enjoyable when you want to buy. Make sure you’re not simply increasing your spending because you can. You’re less likely to have buyer’s remorse if you connect your purchasing with your beliefs and ambitions.
3. Have an emergency fund in place
Now is the time to start if you haven’t done so before. If you ever lose your job, you should attempt to save at least six months’ worth of living costs, which you may use for things like vehicle repairs, hospital appointments, or paying your bills. You won’t have to borrow money, add to your credit card balances, or take cash out of your savings account for other purposes. Find out more about putting your emergency money in a Bank of America savings account. If you get a raise, you can make use of a voided check to set up an electronic link to your bank account and change your direct deposit to transfer a percentage of your income into savings.
4. Pay up debts with high interest rates
According to an analysis conducted by Better Money Habits, one out of every six millennials is concerned about credit card debt. Paying down high-interest debt should be a top priority if you have a little extra cash. It has a trickle-down impact on your money when you get out of debt. You may free up more money for other financial goals by reducing high interest rates and significant minimum payments. Reduced debt can also help you improve your credit score, allowing you to qualify for reduced mortgage and car loan interest rates. Also, ensure you use Credit Derivatives to transfer the risk of default to a third party.
5. Make a plan for how you’ll put your raise to good use
Finally, you should be proactive. Make sure you have a budget, goals, and a strategy in place. Because your ability to manage your cash flow directly influences your capacity to reach your objectives, having a business plan and a budget is crucial. Setting objectives motivate you to keep on track, and a well-thought-out strategy is your road map to success. It’s easier to figure out how to spend more money from a raise after you’ve got these three things in place.
Setting guidelines in advance for handling increases or other unexpected money is another approach to be proactive. You might, for example, set aside a specific proportion for saving or debt repayment, another for charity giving, and still another for enjoyment. You should determine the percentages and categories.
Tips on how to manage your raises efficiently
Depending on the magnitude of the raise, your strategy to manage your funds afterward may change. Small raises may not result in a significant rise in your take-home income, but you may use them to boost contributions to employer-sponsored retirement plans. If you get a 3% raise, for example, you may upgrade your 401(k) contribution by 1-2 percent more. Increasing your Health Savings Account contributions is another possibility. Small savings gains accumulate over time in any case. Don’t let go of those minor raises!
What happens if you get a big raise at work? I strongly advise you to transfer the funds immediately, so you are not tempted to squander them. The first step is to review your tax withholding. A hefty raise may cause you to fall into a higher tax rate in some instances. Consult a tax expert to see if the amount withheld from your salary is adequate. If it isn’t, alter your tax withholding or prepare to make scheduled tax payments before April 15 to avoid any unpleasant surprises.
You can make significant increases to accelerate savings and debt payments, assuming your lifestyle is comfortable. Creating an emergency fund and paying off high-interest debt should be your top priorities. Then, assign your raise to other financial preferences that correspond to your objectives. Increase your automated savings or debt payments before the money reaches your hands.
Take little steps if you’re still striving for a pleasant existence. Make a few large purchases at a time, especially those that need financing. After receiving a significant raise, committing to additional debt and more lavish monthly spending is a financial error that might result in financial regret.
If you recently received a raise, make the most of it! You may utilize income increases to speed your journey to financial independence if you have the appropriate money mentality, goals, and strategy in place.